SEC v. Babikian Doc 21 Filed 31 Mar 13

United States District Court Southern District of New York -------------------------------------------------------x Securities and Exchange Commission,

Plaintiff, v. John Babikian,

Defendant. -------------------------------------------------------x

14 Civ. 1740 PAC DEFENDANT JOHN BABIKIAN’S RESPONSE TO ORDER TO SHOW CAUSE AND EMERGENCY MOTION TO DISSOLVE AND/OR MODIFY THE TEMPORARY RESTRAINING ORDER AND ASSET FREEZE

Case 1:14-cv-01740-PAC Document 21 Filed 03/31/14 of 27

i

TABLE OF CONTENTS

PageI. Preliminary Statement……………………………………………………………..

1

II. Computation of Gain on Stock Sale…………………………………………….....

5

III. Unliquidated Claim for Penalties – Statutory Limitation….……………………

6

IV. The Combination of An Omnibus Asset Freeze on All Babikian Assets;

Attachments and Garnishment of More than $2.5 Million In Cash and Nearly

$9 Million in Real Estate Vastly Exceeds The Bounds Of Prejudgment

Remedies Permitted By Law On Account of Mere $550,000 Disgorgement

Claim………………………………………………………………………………..

11

A. The Freeze Order; Garnishment and Attachments Specifically Attach

More Than $2.5 Million in Cash; More Than $10 million in Specifically

Identified Collateral; and Freeze All Babikian Assets………………………

13

B. Disgorgement Claims Are Limited to Ill-gotten “Gains” – Not Gross

Proceeds…………………………………………………...................................

14

C. Writs of Garnishment and Attachment should also be discharged,

expunged, vacated, dissolved and released because the FDCPA is not

applicable…………………………….. …………………………………………

15

D. The Supreme Court Guides The Court To Exercise Restraint In Granting

Prejudgment Relief At Law Because Doing So Flies In The Face Of

Centuries of Jurisprudence……………………………………………………. 18

V. Conclusion…………………………………………………………………………. 25


DEFENDANT’S RESPONSE TO ORDER TO SHOW CAUSE RE PRELIMINARY INJUNCTION AND REQUEST FOR VACATION, DISCHARGE AND EXPUNGEMENT OF ATTACHMENT AND GARNISHMENT ORDERS - Page 2

Defendant, John Babikian (“Babikian”), submits this response to the order to show cause

why a preliminary injunction should not issue; and requests that the Court vacate, expunge,

discharge and release its writs of garnishment and attachment issued ex-parte under the Federal

Debt Collection Procedures Act (“FDCPA”).

I. Preliminary Statement

Plaintiff, Securities and Exchange Commission (“SEC”) obtained ex-parte from this

Court, without notice to Defendant John Babikian, three massively destructive pre-judgment

remedies pursuant to this Court’s: (1) Order for Temporary Restraining Order and Other

Emergency Relief ("TRO Order"); (2) Prejudgment Writ of Garnishment (DE 5); and (3)

Prejudgment Writ of Attachment for Properties in Los Angeles County California and Wasco

County Oregon (DE 6). All of such relief was based on lay opinions, arguments and innuendo

of the SEC’s investigator, who self-servingly offers his judgment as to a complex puzzle of

unauthenticated documents, the content of which is purely hearsay, without any business

records declarations or any other evidence to justify an exception to the hearsay rule. In short,

the SEC was not entitled to such relief because it failed to prove anything at all with any level

of admissible evidence. See, Defendant John Babikian’s Evidentiary Objections to the

Declaration of Andrew McFall (DE – 15) In Support of Plaintiff’s Application for Temporary

Restraining Order and Preliminary Injunction submitted herewith.

Even if the Court is willing to treat the SEC’s declarant’s lay opinions as admissible

evidence, such that the SEC is deemed to have proven a likelihood of success on the merits of its

complaint against Babikian, the relief afforded the SEC ex-parte goes way too far. At most, the

SEC is entitled to be protected for its disgorgement claim: that is the gain from the stock sales in

just one security in question (America West). The amount of that gain is the proceeds alleged,

$1,915,606, less the cost basis for the approximately 1.4 million shares of America West sold.

The SEC’s own papers admit that for 966,667 shares of America West, Babikian’s cost basis was

at least $1,021,875, or just over a dollar a share. Assuming approximately the same cost for the



remaining 416,988 shares sold, the most the SEC can plausible cause to be disgorged as profits

would be $549,679.

If the Court does find that the SEC has offered sufficient admissible evidence to meet its

burden of proof on the element of likelihood of success, then the Court should order that, in lieu

of any other pre-judgment relief granted, a portion of the approximately $2.5 million of NetJets,

Inc. cash currently frozen may be deposited in the Court’s registry to cover such potential

disgorgement order. All other forms of relief should be expunged, discharged, and released.

The SEC argues that it is also entitled to pre-judgment relief under the FDCPA. The SEC

is not entitled to FDCPA relief for the equitable claim of disgorgement – the freeze order is its

only pre-judgment remedy. The SEC seeks prejudgment remedies under the FDCPA only on its

action at law for punitive damages. But, the FDCPA does not apply because the SEC’s

prospective hope of an award of punitive damages does not constitute a “debt” that “is owing the

United States”, a prerequisite to such pre-judgment relief.

Even if this Court were to find that the SEC had met its burden of proving a likelihood of

success on the merits with admissible evidence, and even if, after freezing the amount of the

potential disgorgement, it felt that the FDCPA provided the SEC with the right to additional

prejudgment remedies of garnishment and attachment, the SEC has gone way too far in securing

assets worth many times the total possible potential recovery on the SEC’s claim of punitive

damages. As detailed below, the SEC has calculated the assets garnished and attached, per the

SEC’s own exhibits, are valued at well in excess of $10 million. Yet, the total maximum punitive

damage claim under law cannot be more than the total amount of disgorgement ordered. So, the

total attachment should not be more than $549,679. SEC v. Kern, 425 F.3d 143, 153 (2d Cir.

2005). At most, the $2.5 million of NetJets, Inc. funds currently frozen should be more than

sufficient to cover both the maximum disgorgement and maximum penalty numbers, even

assuming all allegations in the Complaint and unauthenticated documents to be true. This Court



would be exceeding its discretion if it accepts the SEC’s invitation to grant attachment and

garnishment remedies exceeding that amount.

If this Court finds that the SEC has submitted admissible evidence sufficient to establish

a likelihood of success, Defendant, Babikian, does not object to the entry of a preliminary

injunction preventing him from future violations of the federal securities laws. Babikian also

accepts service through his counsel. Accordingly, there is no reason for the service provisions of

the temporary restraining order to be carried forward to the preliminary injunction.

Babikian objects to the provisions of the Court’s March 13, 2014 TEMPORARY

RESTRAINING ORDER FREEZING ASSETS AND GRANTING OTHER RELIEF, AND

ORDER TO SHOW CAUSE ON A PRELIMINARY INJUNCTION (“TRO”) and preliminary

injunction regarding expedited discovery as unnecessary and unreasonable. For the reasons

stated below, if the Court finds that the SEC has failed to meet their burden of proof, the relief

should be denied on that basis. If the Court finds that the SEC has satisfied its burden of proof

with admissible evidence (which it should not), there is no legitimate basis to demand that

Babikian respond to asset based discovery, such as providing an expedited accounting of his

assets, because the SEC’s equitable claim for disgorgement will be more than adequately

collateralized with cash in the Court’s registry upon transfer of such funds from NetJets, Inc. to

the Court’s registry.

Furthermore, there is no need for depositions to be taken on 2 days’ notice, or written

discovery to be answered within 3 calendar days, as ordered. Given the potential for criminal

prosecution in this case, Babikian would be refusing to answer such discovery based on his Fifth

Amendment right against self-incrimination, unless and until such time as he is afforded

immunity from criminal prosecution. Thus, there is no need or perceived benefit to expediting

that process.



II. Computation of Gain

The SEC alleges that Babikian received $1,915,606 from the sale of America West stock

as a result of unlawfully disclosing to potential investors in the stock that he picked the stock.

Complaint, ¶32; and section IX; and Declaration of Andrew R. McFall (DE 15), ¶53 (“The

1,601,548 shares sold from the Frankfurter Bank omnibus account were sold for an average of

$1.3845 per share. Utilizing that average, Babikian realized illicit gains of $1,915,670 by selling

1,383,655 AWSR shares.”)

From the total proceeds of $1,915,606, the Court should deduct from the plausible gain

amount all costs associated with purchasing those 1,383,655 shares of America West. The

SEC’s investigator, Andrew McFall, admits at paragraphs 40 and 41 of his declaration (DE 15)

that:

40. On or about November 12,2010, Babikian invested $500,000 in

America West in exchange for a $500,000 promissory note and 416,667

restricted America West shares "as additional consideration." See Exhibits

10 through 12 and 39 to this Declaration.

41. On April 20, 2011, America West and Babikian executed a debt

conversion agreement whereby Babikian converted the $500,000

promissory note plus accrued interest (total $521,875) into 550,000 of

restricted America West shares. See Exhibits 13 through 16 to this

Declaration.

Accordingly, as to 966,667 shares of America West, the SEC claims that Babikian’s cost

basis was at least $1,021,875, or just over a dollar a share. Even without accounting for the cost

basis of the other 416,988 shares, the most the SEC can plausible cause to be disgorged as profits

is $894,731 ($1,916,606-$1,021,875). If the Court estimates that the Babikian cost for the

remaining shares is approximately $1 per share, as the SEC admits was his approximate cost



basis for the 966,667 shares shown, the Court should deduct another $416,988 from that

purported “gain”, so that the disgorgement remedy would be, at most $549,679.

III. Unliquidated Claim For Penalties – Statutory Limitation

The SEC seeks the freeze order based on its equitable disgorgement claim; and separately

seeks prejudgment garnishment and attachments on the basis of its punitive damage claim. The

SEC hopes to achieve a punitive damage award of the maximum penalties that are possible under

Section 21(d)(3) of the Securities Exchange Act of 1933, which would be the gross amount of

pecuniary gain to Babikian (whatever amount the Court determines to be the appropriate

disgorgement claim that was proven). But, the facts of this case do not remotely warrant a

presumption of a maximum penalty. The mere prospect of such an award is far from a debt that

“is owing the United States” by Babikian. Thus, the FDCPA provisions do not support pre-

judgment relief.

Babikian is entitled to a jury trial, and to rely on the jury’s exercise of sound discretion,

before his assets can be burdened by pre-judgment remedies based on unliquidated inchoate

claims for penalties. In predicting the approximate amount of penalties that would be awarded

by a jury in this case, this Court should scrutinize the facts alleged by the SEC, which are

patently benign. This is not a case where false statements of fact were made to potential

investors. At most, the SEC is claiming that a disclaimer given with a stock “pick” was

inadequate because, while it did disclose that the publisher’s owner may hold an interest in the

stock that it would sell at any time, it did not disclose that the owner’s stock interest might be

substantial. The underlying presumption is that the reader would assume, based on the

disclosure given, that the owner’s holdings were less substantial than the shares actually

controlled by Babikian. Babikian strongly disagrees with the SEC’s premise. In any event, it is

clear that reasonable minds could differ on the issue and that punitive damages are clearly not

warranted.



There was no false statement. The SEC’s complaint alleges only that an entity

purportedly controlled by Babikian “picked” America West, then sold the stock when the price

ran up. The SEC’s complaint uses colorful language, like “scalping”, to inspire the Court to

criminalize this civil action. But, at its core, the SEC’s complaint simply alleges that Babikian

bought America West stock (i.e. picked the stock for his own portfolio), then disclosed to others

that he had “picked” America West stock (i.e. on a web site frequented by day traders gambling

on the fluctuations in penny stocks) – and then sold the stock when the stock price ran up. The

SEC’s complaint at paragraph 28 admits that the Internet web site in question specifically

warned investors of the risk that the stock was being “picked” by someone who might profit

from the stock price increasing as a result of the stock being “picked”:

These touts each bore a disclaimer, which stated in part that the

issuing newsletter's website (PennyStocksUniverse.com or

AwesomePennyStocks.com, respectively), "is owned and operated

by Centro Azteca S.A.", and further, that "[the respective issuing

newsletter's website], its operators, owners, employees and affiliates

may have interests or positions in equity securities of the

companies profiled on this website, some or all of which may

have been acquired prior to the dissemination of this report,

and may increase or decrease these positions at any time."

[Emphasis added.]

The SEC attached a copy of AwesomePennyStocks.com cautionary disclaimer at Exhibit 56 to

the declaration of Andrew McFall (DE 11-22). A full reading of the disclaimer reveals even

more clear and detailed warnings to investors that the owners and affiliates of the publisher of

the web site may be profiting from transactions in the stock picked by that web site:

DISCLAIMER: Never invest in any stock featured herein unless

you can afford to lose your entire investment. Neither



AwesomePennyStocks.com, nor its employees, and affiliates are

registered as investment advisors or broker/dealers in any

jurisdiction whatsoever. The information contained herein is based

on sources that AwesomePennyStocks.com believes to be reliable

but is not guaranteed by us as being accurate and does not

purport to be a complete statement or summary of the available

data. Readers should always do their own due diligence and

consult a financial professional. AwesomePennyStocks.com

encourages readers and investors to supplement the information in

this report with independent research and other professional

advice. All information on the featured company is provided by the

company profiled, or is available form public sources and

AwesomePennyStocks.com makes no representations, warranties or

guarantees as to the accuracy or completeness of the disclosure by

the profiled company. Any opinions expressed on this report are

statements or judgments as of the date of publication and are subject

to change without further notice, and may not necessarily be

reprinted in future publications or elsewhere.

None of the materials or advertisements herein constitute offers or

solicitations to purcahse or sell securities of the company profiled

herein and any decision to invest in any such company or other

financial decisions should not be made based upon the

information provide [sic] herein. Instead,

AwesomePennyStocks.com strongly urges you conduct a complete

and independent investigation of the respective companies and



consideration of all pertinent risks. AwesomePennyStocks.com

does not offer such advice or analysis, and

AwesomePennyStocks.com further urges you to consult your own

independent tax, business, financial and investment advisors.

Investing in micro-cap and growth securities is highly specutlative

and carries an extremely high degree of risk. It is possible that an

invetor’s investment may be lost or impaired due to the speculative

nature of the company profiled. AwesomePennyStocks. Com, its

operators, owners, employees, and affiliates may have interests

or positioins in equity securities of the companies profiled on this

website, some or all of which may have been acquired prior to the

dissemination of this report, and may increase or decrease these

positions at any time.

This report may contain forward-looking statements, which involve

risks and uncertainties. Accordingly no assurance can be given that

the actual events and results will not be materally different than the

anticipated results described in the forward-looking statement. There

are a number of important factors that could cause actual results to

differ materially from those expressed in any forward-looking

statements made by AwesomePennyStocks.com about the company

profiled. These factors include the company’s success in their

business operations; the activities of new or existing competitors, the

ability to attract and retain employees and strategic partners, the

ability to leverage intangible assets, the ability to complete new

projectss at planned costs and on planned schedules and adoption of



the internet as a medium of commerce, communications and

learning. If applicable, investors are also directed to consider other

risks and uncertainties discussed in documents filed by the profiled

company with the Securities and Exchange Commission.

AwesomePennyStocks.com undertakes no obligation to publicly

release the results of any revisions to these forward-looking

statements, which may be made to reflect events or circumstances

after the date hereof or to reflect the occurance of unanticipated

events. (emphasis added).

AwesomePennyStocks.com is owned and operated by Centro

Azteca S.A. The Company expects to receive €15,000 from a third

party through the Tengeria Foundation for publication of this

information. This compensation may constitute a conflict of

interest as to AwesomePennyStocks.com’s ability to remain

objective in our communications regarding the profiled

company. (emphasis added) See, DE 11-22.

The most simple minded of reasonable investors reading the referenced cautionary disclaimer

would understand that the authors of the “pick” are likely to be holding a substantial position in

the stock and intend to sell it if the price goes up precipitously, as it did here. Why else would

the publisher disclose its interests and right to liquidate with respect to the stock picked? Against

the backdrop of such a specific cautionary disclaimer, there can reasonably be no assessment of

punitive damages. There was no intent to deceive. The question is one of technical compliance.

Reasonable minds could differ on whether the disclaimer was or was not adequate. But, no

reasonable mind could conclude that the disclaimer was so inadequate as to constitute an

intentional fraud on the recipient of such disclaimer.



The disclaimer specifically notified readers that the owner of the web site “may have a

position” in America West which “may have been acquired prior to the dissemination of this

report” and that the owner may sell that position “at any time.” See, DE 11-22. It does not say

that the position is nominal or immaterial, as the SEC asks the Court to infer. In fact, that makes

no sense. If the position was always nominal or immaterial, the disclaimer would be

unnecessary. The disclaimer does not remotely suggest that the stock position will be held for

any length of time. Indeed, it warns that the position could be liquidated at any time. No

reasonable person reading this disclaimer could have surmised that the owner of this web site

would wait until after the pick was published before buying the stock (after the expected rise in

price); or that the owner would refrain from selling his position into a massive rally in the stock

price of the stock “picked”, as allegedly occurred here. If there was any violation here, it is one

of the most technical of errors, not one of open defiance of the law, as might warrant a civil

penalty. Disgorgement is unwarranted, much less any civil penalty, and there is simply no

justification here for the maximum civil penalties presumed by the SEC.

IV. The Combination of An Omnibus Asset Freeze on All Babikian Assets; Attachments

and Garnishment of More than $2.5 Million In Cash and Nearly $9 Million in Real

Estate Vastly Exceeds The Bounds Of Prejudgment Remedies Permitted By Law On

Account of Mere $550,000 Disgorgement Claim.

"It [is] incumbent on a district court to 'match the scope of its injunction to the most probable

size of the likely judgment,' thereby sparing the defendant from undue hardship." Grupo

Mexicano De Desarrollo, S.A., et al. v. Alliance Bond Fund, Inc., et al., 527 U.S. 308, 340-41

(1999) (“Grupo”). Grupo Mexicano, 527 U.S. at 340-41 (quoting Hoxworth v. Blinder,

Robinson & Co., 903 F.2d 186, 199 (3rd Cir. 1990)). Here, a freeze of all Defendants' assets,

combined with a garnishment of over $2.5 million in cash, and attachments on over $8 million in

real estate, goes so far beyond the relief that the SEC has proven to be entitled, that, with due



respect to the Court, the combined prejudgment relief granted by this Court ex-parte constitutes

an abuse of discretion.

A court has only discretion to grant "an asset freeze [that] is narrowly drawn to sequester

only those funds necessary to satisfy the potential judgment." Animale Group Inc. v. Sunny's

Perfume, Inc., 2007 WL 4259200, at *2 (5th Cir. Dec. 5, 2007) (emphasis added). An asset

freeze may not be used to sequester alleged penalties. SEC v. ETS Pay phones, Inc., 408 F.3d

727, 735 (11th Cir. 2005). Thus, when equitable relief is sought, "the district court [i]s authorized

to preserve the status quo by entering a limited asset freeze" only. Animale Group, 2007 WL

4259200, at *2 (emphasis added). The Third Circuit set aside an asset freeze because "the district

court made no attempt to ensure that the value of assets encumbered bore some reasonable

relationship to the likely amount of plaintiff s expected recovery." Hoxworth, 903 F.2d at 189.

Instead, the injunction encumbered all of defendants' assets in a "worldwide, multi-million dollar

asset dragnet." Id. at 199. Moreover, a district court's failure to make "some attempt to tailor the

scope of the injunction to the likely size of the judgment" is an abuse of discretion. Id. (emphasis

in original).

This Court should not accept the SEC’s invitation to maintain the TRO through a

preliminary injunction, and should expunge its Writs of Attachment and Garnishment, as all

three Orders of the Court exceed the Court’s powers with respect to granting prejudgment

remedies and, respectfully, would constitute an abuse of discretion.

The freeze order is excessive. The limits of the Court’s power to grant an asset freeze is

the amount of the disgorgement claim (i.e. the amount the SEC has proven, with admissible

evidence, would be disgorged as illgotten gains) – at most $549,679. The freeze order sought

would reach any and all of Babikian’s assets, any and all direct or indirect interests in any

business, and even prevent his ability to retain counsel. There is no justification for such a

freeze, because even if the Court were to find that the SEC has proven with admissible evidence

a likelihood of success (which it has not), the full amount of the likely disgorgement would be



immediately deposited in cash in the Court’s registry through a transfer of the portion of the

funds held at NetJets, Inc. necessary to fully cover that amount. No further prejudgment

imposition on Mr. Babikian’s property rights is warranted.

The writs of garnishment and attachment can only apply to the SEC’s punitive damage

claim (not duplicative of the SEC’s equitable claim for disgorgement covered by the freeze

order), and because Babikian is entitled to a jury trial on that claim at law and the jury has broad

discretion in assessing a punitive damage claim, the SEC’s punitive damage claim has simply not

matured to the point where the Court can determine an “amount is owing to the United States”,

which is a pre-requisite to the imposition of prejudgment remedies under the Federal Debt

Collection Procedures Act (28 USC §3001 et seq.) (hereafter, the “FDCPA”). See 28 USC

3002(3)(B).

A. The Freeze Order; Garnishment and Attachments Specifically Attach More

Than $2.5 Million in Cash; More Than $10 million in Specifically Identified

Collateral; and Freeze All Babikian Assets.

The SEC has obtained the following prejudgment measures ex-parte through the Court’s

Garnishment, Attachment and TRO relief:

1. NetJets cash held: $2,545,289.55 (NetJets, Inc. Answer at DE 17); McFall

Declaration, ¶7;

2. “properties located in Los Angeles” worth over $8,225,000, including:

a. Londonberry property purchased for $6 million in cash (McFall Declaration,

¶67);

b. Laurel Canyon bought for $2,225,000 in cash (McFall Declaration, ¶ 68;

Exhibit 49 at DE 11-15) pending for sale at $2,595,000 (McFall Decl., ¶54).

3. Wasco, Oregon property: 4455 Emerson Loop Rd., The Dalles, OR with a "market

total value" of $448,250. McFall paragraph 73, Exh. 47 or 50.



Thus, using the SEC’s own numbers and documents, the SEC has attached and garnished

over $2.5 million in cash, and nearly $9 million in real estate assets, all on the strength of a

$550,000 disgorgement claim that it has not proven with any admissible evidence. Beyond that,

it has essentially prevented Babikian from retaining even one penny of his resources, even as

necessary to defend himself in this case. The law does not support such onerous and excessive

prejudgment relief.

B. Disgorgement Claims Are Limited To Illgotten “Gains” – Not Gross Proceeds.

The SEC’s disgorgement claim is limited to proven “gains”, not the total proceeds of

Babikian’s sales. The proper amount of disgorgement in SEC civil actions is well established

under the law. The purpose of disgorgement is not to compensate victims of a securities fraud,

rather the purpose of disgorgement is to deprive a wrongdoer from his ill-gotten gain. SEC v.

Blatt, 583 F.2d 1325 (5th Cir. 1978). Disgorgement of gain is remedial not punitive. Id. The

power of the Court to order disgorgement of the gain stemming from a securities fraud extends

only to the amount with interest by which the defendant profited from his wrongdoing; any

further sum would constitute a penalty. Id. In SEC v. Thomas James Associates, Inc., 738 F.

Supp. 88 (W.D.N.Y. 1990), the court explained that the amount to be disgorged must be causally

related to the wrongdoing. The court also held that a court may consider as an offset the sums

which a defendant paid to effect a fraudulent transaction. In S.E.C. v. Better Life Club of

America, Inc., 995 F. Supp. 167 (D.D.C. 1998), the court ruled that because disgorgement is so

specifically aimed at ill-gotten profits, it is only to be exercised over property "causally related to

the wrongdoing". In SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2nd Cir. 1972), the

court held that the defendant can be compelled to disgorge only the profits and interest

wrongfully obtained. The actual profit defendants obtain serves as the equation for determining a

disgorgement award. National Westminster Bancorp v. Leone, 702 F. Supp. 1132 (D.N.J. 1988).

The SEC bears the burden of demonstrating that its disgorgement figure meets this standard.

SEC v. First City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). If benefits result from both



lawful and unlawful conduct, plaintiff must distinguish these legal and illegal profits. CFTC v.

British Am. Commodity Options Corp., 788 F.2d 92, 93 (2nd Cir.), cert. denied, 479 U.S. 853,

107 S. Ct. 186, 93 L. Ed. 2d 120 (1986); SEC v. Patel 61 F.3d 137 (2d. Cir. 1995).

The SEC overreaches by not setting forth the cost basis of Babikian’s stock purchases.

The allegedly illgotten “gain” is all that the SEC could possibly prove that it is likely to recover

in this action, as the law limits maximum disgorgement to that amount. Once that amount is

determined by the Court, that amount of money shall be transferred to the Court registry from the

proceeds garnished and held by NetJets. Babikian contends that the SEC has failed to prove with

admissible evidence any likelihood of success. But, if the Court disagrees with that position,

Babikian contends, in the alternative, that the amount should be approximately $550,000, as

detailed above. In any event, whatever amount the Court finds to be the likely disgorgement

amount to be proven in this case, if any, the NetJets garnishment of $2,545,289.55 far exceeds

that amount and should, upon transfer by NetJets to the Court registry of that amount, should

fully satisfy the SEC’s legitimate need for prejudgment relief in this case.

All other prejudgment remedies, including the Court’s Writs of Garnishment and

Attachment, and the TRO should be vacated, expunged, discharged and released.

C. The Writs of Garnishment and Attachment should also be discharged,

expunged, vacated, dissolved and released because the FDCPA is not applicable.

The Court’s ex-parte Writs of Garnishment and Attachment obtained by the SEC ex-

parte were unlawful from the outset and, even if lawful, far exceeded the bounds of the Court’s

statutory authority.

The FDCPA sets the statutory basis for the SEC’s request for a pre-judgment writ of

attachment and writ of garnishment. These pre-judgment remedies are a gigantic departure from

centuries of jurisprudence requiring a judgment to be secured in a civil action before a plaintiff is

allowed to interfere with the private property rights of a defendant. These extraordinary pre-



judgment remedies should be granted by courts only if the statutes upon which they are sought

very clearly apply and no further than the bounds of such statutes permit.

The fundamental problem with the SEC’s application of the FDCPA statutes is that no

amount of debt is owing to the United States on account of the SEC’s punitive damage claim

against Babikian. Section 3101 of Title 28, titled “Prejudgment remedies” provides, in relevant

part:

(a) Application. (1) The United States may, in a proceeding in conjunction with the

complaint or at any time after the filing of a civil action on a claim for a debt, make application under oath to a court to issue any prejudgment remedy….

(b) Grounds. Subject to section 3102, 3103, 3104, or 3105 [28 USCS § 3102, 3103, 3104, or 3105], a prejudgment remedy may be granted by any court if the United States shows reasonable cause to believe that--

(1) the debtor-- …(B) has or is about to assign, dispose, remove, conceal,

ill treat, waste, or destroy property with the effect of hindering, delaying, or defrauding the United States;

…(c) Affidavit. (1) The application under subsection (a) shall include an affidavit

establishing with particularity to the court's satisfaction facts supporting the probable validity of the claim for a debt and the right of the United States to recover what is demanded in the application.

(2) The affidavit shall state-- (A) specifically the amount of the debt claimed by the United

States and any interest or costs attributable to such debt;…

Debt is defined at 28 USC §3002(3)(B) as “an amount that is owing to the

United States on account of a fee, duty, lease, rent, service, sale of real or personal

property, overpayment, fine, assessment, penalty, …” Emphasis added.

Here, no amount of debt is owing to the United States with respect to the SEC’s punitive

damage claim. 28 USC 3002(3)(B). Thus, the SEC is not able to submit the requisite Affidavit

to obtain relief under Section 3101 of the FDCPA.



The SEC argues that in a couple of non-SEC enforcement cases, district courts have

found that the FDCPA applies to allow prejudgment remedies. But, in each of the SEC’s cases,

the underlying claims were for the recovery of transfers actually made to the defendant, such that

the amount of the claim for money was known and the government could prove that the debt was

an amount currently owing to the United States. That is not the case here. This distinction was

well explained by the District Court in Maine, as follows:

The initial problem with the government's position is that the FDCPA definition of "debt" is written in the present tense. A "debt" to which the Act applies is one "that is owing." The government concedes that the defendant "is not currently liable for a debt,'" Memorandum of Law in Support of the Applicability of the Federal Debt Collection Procedures Act ("Plaintiff's Memorandum") (Docket No. 30) at 1, but contends that it is nonetheless a debtor because the government has asserted "a claim for a debt" against it, id. at 1-2. This interpretation would read the definition of "debt" out of the Act and, as the defendant observes, Defendant's Supplemental Memorandum in Opposition to the Government's Application for Pre-Judgment Remedies ("Defendant's Memorandum") (Docket No. 28) at 4, would allow the federal government to seek prejudgment remedies in virtually every civil action it might file. I agree with the Eleventh Circuit in its recent observation that the FDCPA is inapplicable when the government is not seeking to recover for a judgment or to obtain any assets, but rather "to freeze assets to prevent their disbursement." SEC v. ETS Payphones, Inc., 408 F.3d 727, 735 (11th Cir. 2005). None of the case law cited by the government, Plaintiff's Memorandum at 3-5, supports its contention that penalties and fines sought by the government for the first time in the underlying action are "debts" within the meaning of the FDCPA. In each case, some existing financial obligation to the government was at issue. [fn. 1 omitted.] For example, in United States v. Teeven, 862 F. Supp. 1200 (D. Del. 1992), the case on which the plaintiff relies most heavily, the government employed the FDCPA in connection with its attempt to recover government funds allegedly wrongfully transferred to the individual defendants, id. at 1207-08,1210-11. The government did not contend in that case, as it does here, that the mere filing of a claim for fines and penalties justifies the imposition of remedies under the FDCPA.

US v. Cap Quality Care, Inc, 400 F.Supp. 2d 295, 299 (D. Maine 2005). Emphasis added.



The only claim for money at law that is asserted in the Complaint is a claim for punitive

damages. But, no punitive damages have been assessed. Punitive damages are not owed until

they are assessed. The amount of the punitive damages that might be assessed is a matter within

the discretion of the jury and could be determined to be anything from zero to the total amount of

the illgotten gain awarded, which could be, at most, $550,000.

Accordingly, the SEC is not entitled to any prejudgment relief under the FDCPA. Even

if it was, it could attach or garnish only $550,000. Under power of ex-parte orders obtained from

this Court, the SEC acted without restraint, grabbing over $2.5 million in cash on the NetJets

garnishment (see DE 17), plus over $8 million in real estate. In doing so, the SEC would have

this Court assume a civil penalty of 20 times the amount of the profit from the alleged

transactions, even though the statutory limit is one times the illgotten gain. No statute remotely

authorizes the SEC to do what it has done in this case.

Even if the writs of garnishment and attachment were warranted under existing law

(which they are not), this Court should restrain the SEC to the “amount [that] is owing to the

United States”, which Babikian asserts is nothing. The disgorgement claim, which is more than

fully secured by the freeze order, should not be double counted in computing the appropriate

“amount [that] is owing to the United States”. Disgorgement, an equitable remedy, is not

properly treated under the FDCPA, in any event.

D. The Supreme Court Guides The Court To Exercise Restraint In Granting

Prejudgment Relief At Law Because Doing So Flies In The Face Of Centuries of

Jurisprudence.

The Supreme Court warns against judicial expansion of pre-judgment remedies in Grupo:

The Judiciary Act of 1789 conferred on the federal courts jurisdiction over "all suits . . . in equity." 1 Stat. 78. We have long held that "the 'jurisdiction' thus conferred . . . is an authority to administer in equity suits the principles of the system of judicial remedies which had been devised and was being administered by the English Court of Chancery at the time



of the separation of the two countries." Atlas Life Ins. Co. v. W. I. Southern, Inc., 306 U.S. 563, 568, 83 L. Ed. 987, 59 S. Ct. 657 (1939). See also, e.g., Stainback v. Mo Hock Ke Lok Po, 336 U.S. 368, 382, n. 26, 93 L. Ed. 741, 69 S. Ct. 606 (1949); Guaranty Trust Co. v. York, 326 U.S. 99, 105, 89 L. Ed. 2079, 65 S. Ct. 1464 (1945); Gordon v. Washington, 295 U.S. 30, 36, 79 L. Ed. 1282, 55 S. Ct. 584 (1935). "Substantially, then, the equity jurisdiction of the federal courts is the jurisdiction in equity exercised by the High Court of Chancery in England at the time of the adoption of the Constitution and the enactment of the original Judiciary Act, 1789 (1 Stat. 73)." A. Dobie, Handbook of Federal Jurisdiction and Procedure 660 (1928). "The substantive prerequisites for obtaining an equitable remedy as well as the general availability of injunctive relief are not altered by [Rule 65] and depend on traditional principles of equity jurisdiction." 11A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure § 2941, p. 31 (2d ed. 1995). We must ask, therefore, whether the relief respondents requested here was traditionally accorded by courts of equity. … The United States as amicus curiae, however, contends that the preliminary injunction issued in this case is analogous to the relief obtained in the equitable action known as a "creditor's bill." This remedy was used (among other purposes) to permit a judgment creditor to discover the debtor's assets, to reach equitable interests not subject to execution at law, and to set aside fraudulent conveyances. See 1 D. Dobbs, Law of Remedies § 2.8(1), pp. 191-192 (2d ed. 1993); 4 S. Symons, Pomeroy's Equity Jurisprudence § 1415, pp. 1065-1066 (5th ed. 1941); 1 G. Glenn, Fraudulent Conveyances and Preferences § 26, p. 51 (rev. ed. 1940). It was well established, however, that, as a general rule, a creditor's bill could be brought only by a creditor who had already obtained a judgment establishing the debt. See, e.g., Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497, 67 L. Ed. 763, 43 S. Ct. 454 (1923); Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 378-379, 37 L. Ed. 1113, 14 S. Ct. 127 (1893); Cates v. Allen, 149 U.S. 451, 457, 37 L. Ed. 804, 13 S. Ct. 883 (1893); National Tube Works Co. v. Ballou, 146 U.S. 517, 523-524, 36 L. Ed. 1070, 13 S. Ct. 165 (1892); Scott v. Neely, 140 U.S. 106, 113, 35 L. Ed. 358, 11 S. Ct. 712 (1891); Smith v. Railroad Co., 99 U.S. 398, 401, 25 L. Ed. 437 (1879); Adler v. Fenton, 65 U.S. 407, 24 HOW 407, 411-413, 16 L. Ed. 696 (1861); see also 4 Symons, supra, at 1067; 1 Glenn, supra, § 9, at 11; F. Wait, Fraudulent Conveyances and Creditors' Bills § 73, pp. 110-111 (1884). The rule requiring a judgment was a product, not just of the procedural requirement that remedies at law had to be exhausted before equitable remedies could be pursued, but also of the substantive rule that a general creditor (one



without a judgment) had no cognizable interest, either at law or in equity, in the property of his debtor, and therefore could not interfere with the debtor's use of that property. As stated by Chancellor Kent: "The reason of the rule seems to be, that until the creditor has established his title, he has no right to interfere, and it would lead to an unnecessary, and, perhaps, a fruitless and oppressive interruption of the exercise of the debtor's rights." Wiggins v. Armstrong, 2 Johns. Ch. 144, 145-146 (N. Y. 1816). See also, e.g., Guaranty Trust Co., supra, 326 U.S. at 106-107, n. 3; Pusey & Jones Co., supra, at 497; Cates, supra, at 457; Adler, supra, 65 U.S. at 411-413; Shufeldt v. Boehm, 96 Ill. 560, 564 (1880); 1 Glenn, supra, § 9, at 11; Wait, supra, § 52, at 81, § 73, at 113. … For their part, as noted above, respondents do not discuss creditor's bills at all. Particularly in the absence of any discussion of this point by the lower courts, we are not inclined to speculate upon the existence or applicability to this case of any exceptions, and follow the well-established general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor's use of his property.

…Joseph Story's famous treatise reflects what we consider the proper rule, both with regard to the general role of equity in our "government of laws, not of men," and with regard to its application in the very case before us:

"Mr. Justice Blackstone has taken considerable pains to refute this doctrine. 'It is said,' he remarks, 'that it is the business of a Court of Equity, in England, to abate the rigor of the common law. But no such power is contended for. Hard was the case of bond creditors, whose debtor devised away his real estate . . . . But a Court of Equity can give no relief . . . .' And illustrations of the same character may be found in every state of the Union. . . . In many [States], if not in all, a debtor may prefer one creditor to another, in discharging his debts, whose assets are wholly insufficient to pay all the debts." 1 Commentaries on Equity Jurisprudence § 12, pp. 14-15 (1836). See also infra, at 24-25. We do not question the proposition that equity is flexible; but in the federal system, at least, that flexibility is confined within the broad boundaries of traditional equitable relief. To accord a type of relief that has never been available before -- and especially (as here) a type of relief that has been specifically disclaimed by longstanding judicial precedent -- is to invoke a "default rule," post, at 11, not of flexibility but of omnipotence. When there are indeed new conditions that might call for a wrenching departure from past



practice, Congress is in a much better position than we both to perceive them and to design the appropriate remedy. … Even in the absence of historical support, we would not be inclined to believe that it is merely a question of procedure whether a person's unencumbered assets can be frozen by general-creditor claimants before their claims have been vindicated by judgment. It seems to us that question goes to the substantive rights of all property owners. In any event it appears, as we have observed, that the rule requiring a judgment was historically regarded as serving, not merely the procedural end of assuring exhaustion of legal remedies (which the merger of law and equity could render irrelevant), but also the substantive end of giving the creditor an interest in the property which equity could then act upon. See supra, at 11. 6 As we stated in Adler v. Fenton, 65 U.S. 407, 24 HOW 407, 411-412, 16 L. Ed. 696 (1861): "'Our laws determine with accuracy the time and manner in which the property of a debtor ceases to be subject to his disposition, and becomes subject to the rights of his creditor. A creditor acquires a lien upon the lands of his debtor by a judgment; and upon the personal goods of the debtor, by the delivery of an execution to the sheriff. It is only by these liens that a creditor has any vested or specific right in the property of his debtor. Before these liens are acquired, the debtor has full dominion over his property; he may convert one species of property into another, and he may alienate to a purchaser. The rights of the debtor, and those of a creditor, are thus defined by positive rules; and the points at which the power of the debtor ceases, and the right of the creditor commences, are clearly established. These regulations cannot be contravened or varied by any interposition of equity'" (quoting Moran v. Dawes, 1 Hopk. Ch. 365, 367 (N. Y. 1825)). …"To sustain the challenged order would create a precedent of sweeping effect. This suit, as we have said, is not to be distinguished from any other suit in equity. What applies to it applies to all such. Every suitor who resorts to chancery for any sort of relief by injunction may, on a mere statement of belief that the defendant can easily make away with or transport his money or goods, impose an injunction on him, indefinite in duration, disabling him to use so much of his funds or property as the court deems necessary for security or compliance with its possible decree. And, if so, it is difficult to see why a plaintiff in any action for a personal judgment in tort or contract may not, also, apply to the chancellor for a so-called injunction sequestrating his opponent's assets pending recovery and satisfaction of a judgment in such a law action. No relief of this character has been thought justified in the long history of equity jurisprudence." Id. at 222-223.



The statement in the last two sentences, though dictum, confirms that the relief sought by respondent does not have a basis in the traditional powers of equity courts. …But there are weighty considerations on the other side as well, the most significant of which is the historical principle that before judgment (or its equivalent) an unsecured creditor has no rights at law or in equity in the property of his debtor. As one treatise writer explained: "A rule of procedure which allowed any prowling creditor, before his claim was definitely established by judgment, and without reference to the character of his demand, to file a bill to discover assets, or to impeach transfers, or interfere with the business affairs of the alleged debtor, would manifestly be susceptible of the grossest abuse. A more powerful weapon of oppression could not be placed at the disposal of unscrupulous litigants." Wait, Fraudulent Conveyances, § 73, at 110-111. The requirement that the creditor obtain a prior judgment is a fundamental protection in debtor-creditor law -- rendered all the more important in our federal system by the debtor's right to a jury trial on the legal claim. There are other factors which likewise give us pause: The remedy sought here could render Federal Rule of Civil Procedure 64, which authorizes use of state prejudgment remedies, a virtual irrelevance. Why go through the trouble of complying with local attachment and garnishment statutes when this all-purpose prejudgment injunction is available? More importantly, by adding, through judicial fiat, a new and powerful weapon to the creditor's arsenal, the new rule could radically alter the balance between debtor's and creditor's rights which has been developed over centuries through many laws -- including those relating to bankruptcy, fraudulent conveyances, and preferences. Because any rational creditor would want to protect his investment, such a remedy might induce creditors to engage in a "race to the courthouse" in cases involving insolvent or near-insolvent debtors, which might prove financially fatal to the struggling debtor. (In this case, we might observe, the respondents did not represent all of the holders of the Notes; they were an active few who sought to benefit at the expense of the other noteholders as well as GMD's other creditors. 11 ) …We do not decide which side has the better of these arguments. We set them forth only to demonstrate that resolving them in this forum is incompatible with the democratic and self-deprecating judgment we have long since made: that the equitable powers conferred by the Judiciary Act of 1789 did not include the power to create remedies previously unknown to equity jurisprudence. Even when sitting as a court in equity, we have no authority to craft a "nuclear weapon" of the law like the one advocated here. Joseph Story made the point many years ago:



"If, indeed, a Court of Equity in England did possess the unbounded jurisdiction, which has been thus generally ascribed to it, of correcting, controlling, moderating, and even superceding the law, and of enforcing all the rights, as well as the charities, arising from natural law and justice, and of freeing itself from all regard to former rules and precedents, it would be the most gigantic in its sway, and the most formidable instrument of arbitrary power, that could well be devised. It would literally place the whole rights and property of the community under the arbitrary will of the Judge, acting, if you please, arbitrio boni judicis, and it may be, ex aequo et bono, according to his own notions and conscience; but still acting with a despotic and sovereign authority. A Court of Chancery might then well deserve the spirited rebuke of Seldon; 'For law we have a measure, and know what to trust to -- Equity is according to the conscience of him, that is Chancellor; and as that is larger, or narrower, so is Equity. 'T’is all one, as if they should make the standard for the measure the Chancellor's foot. What an uncertain measure would this be? One Chancellor has a long foot; another a short foot; a third an indifferent foot. It is the same thing with the Chancellor's conscience.'" 1 Commentaries on Equity Jurisprudence § 19, at 21. The debate concerning this formidable power over debtors should be con-ducted and resolved where such issues belong in our democracy: in the Congress. * * *

Because such a remedy was historically unavailable from a court of equity, we hold that the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents' contract claim for money damages. We reverse the judgment of the Second Circuit and remand the case for further proceedings consistent with this opinion.

Id. Emphasis added.

Following the Grupo decision, the Eleventh Circuit grappled with the reach of the SEC’s

prejudgment remedies in SEC v. ETS Payphones, Inc., 408 F.3d 727 (11th Cir. 2005). In that

case, the Eleventh Circuit reviewed the propriety of the district court’s freeze order to ensure

collection of a disgorgement claim. Edwards argued that the Grupo decision prevented a pre-

judgment freeze of his assets. The Eleventh Circuit held that Grupo was inapplicable because

disgorgement is an equitable remedy, not a legal remedy. Id. at 734, fn 6; citing United States ex



rel. Rahman v. Oncology Assocs., 198 F.3d 489, 498 (4th Cir. 1999); SEC v. Blatt, 583 F.2d

1325, 1335 (5th Cir. 1978); Tull v. United States, 481 U.S. 412 (1987). Grupo, explained the

Eleventh Circuit, does not limit the Court’s ability to preserve the status quo so that equitable

relief can be afforded in the case, but does apply instead to limit prejudgment remedies based on

claims at law. Id. at 734, citing Deckert v. Independence Shares Corp., 311 U.S. 282 (1940) and

United States v. First Nat. City Bank, 379 U.S. 378(1965). See also Serio v. Black, Davis &

Shue Agency, Inc., 2005 U.S. Dist. LEXIS 39018 (SDNY 2006); JSC Foreign Economic Ass'n

Technostroyexport v. Int'l Development & Trade Servs., Inc., 295 F. Supp.2d 366, 387-89

(S.D.N.Y. 2003); Republic of Philippines v. Marcos, 806 F.2d 344, 355-56 (2d Cir. 1986); SEC

v. Cavanaugh, 445 F.3d 105, 116-117 (2d Cir. 2006).

Interestingly, the defendant, Edwards, unsuccessfully argued that the SEC must proceed

under the FDCPA as the exclusive remedy for collection of any award in that case. The Eleventh

Circuit expressly declined to follow the FDCPA, explaining that “[T]he FDCPA applies to

situations where the government seeks ‘to recover a judgment on a debt; or to obtain, before

judgment on a claim for a debt, a remedy in connection with such claim.’ SEC v. ETS

Payphones, Inc., 408 F.3d at 735, citing 28 U.S.C. § 3001(a).” The FDCPA is inapplicable to

this case for two reasons. First, the SEC is not now seeking to recover for a judgment or ‘obtain’

any assets. At this point, the SEC is attempting to freeze assets to prevent their disbursement

Second, the statutory definition of ‘prejudgment remedy’ does not include disgorgement. 28

U.S.C. § 3002(11). Id.

Babikian accepts the rationale of ETS Payphones Inc. and the other cases cited above,

and submits that the freeze order, as applied to the disgorgement claim only (not the legal claim

for punitive damages) is appropriate. If and only to the extent that the Court finds that the SEC

has met its burden of proving that it would likely succeed on its disgorgement claim, and

determines the amount of gain that the SEC is likely to recover, Babikian would consent to the

transfer of the funds held by NetJets to the Court registry in an amount determined by the Court



to be an approximation of the illgotten gains proven by the SEC (which Babikian asserts should

be, at most, $550,000.)

IV. CONCLUSION

The SEC has attempted to win this case through heavy handed ex-parte prejudgment

remedies, thereby depriving Defendant, Babikian, with the assets he needs to defend himself.

Such an approach is not authorized by existing law and cannot be sanctioned by the Court. This

is precisely the type of pre-judgment creditor abuse described as a “nuclear weapon” about

which the Supreme Court warned in Grupo Mexicano De Desarrollo, S.A., et al. v. Alliance

Bond Fund, Inc., et al., 527 U.S. 308; 119 S. Ct. 1961; 144 L. Ed. 2d 319 (1999). The combined

freeze order provisions of the TRO, Attachment Order and Garnishment Order provide the SEC

with limitless liens affecting countless unknown people and entities and untold assets that the

SEC knows to be worth more than 20 times the amounts reasonably at issue in this case. This is

particularly outrageous under the circumstances of this case, where cash is readily available to be

deposited in the Court registry to give the SEC every bit as much asset protection as it is entitled

to under existing law, where the evidentiary showing is nominal, at best, and where the prospect

for punitive damages is highly unlikely. If the Court finds that some prejudgment relief is

warranted, based on the admissible evidence presented by the SEC, it should limit such relief to

the amount of “gain” determined to be obtained on the alleged sales, which amount could be

immediately transferred to the Court registry out of the $2.5 million garnished and held by

NetJets, Inc. (see DE 17). Otherwise, the TRO, Attachment Order and Garnishment Order

should be vacated, expunged, discharged and released. To the extent the SEC has filed any such

documents in any governmental title offices, it should be directed to file whatever lien release

documents may be necessary to expunge and discharge such recordings. That is all the relief to

which the SEC is entitled on a pre-judgment basis based on their claims, and that amount of

money will more than adequately secure the full recover of the SEC’s disgorgement claim, even

if it is fully successful (which Babikian contends it should not be).



Dated: New York, New York March 31, 2014 Respectfully submitted, CORRIGAN & MORRIS, LLP

By: /s/ Stanley C. Morris Stanley C. Morris

Corrigan & Morris LLP 201 Santa Monica Blvd., Suite 475 Santa Monica, CA 90401 (310) 394-2828 Tel. (310) 394-2825 Fax


SEC v. Babikian Doc 21 Filed 31 Mar 13

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